Rolling Assets Into Trust - Hull on Estate and Succession Planning Podcast #84

Posted on October 30^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag:  Hi, and welcome to Hull on Estate and Succession Planning.  You’re listening to Episode #84 of our podcast on Tuesday, October 30^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada.  Here are Ian and Suzana.

Ian Hull:  Hi Suzana.

Suzana Popovic-Montag:  Hi there Ian.  How are you?

Ian Hull:  Just terrific thanks.

Suzana Popovic-Montag:  That’s good.  Already for Halloween?

Ian Hull:  Almost.

Suzana Popovic-Montag:  That’s good.

Ian Hull:  Nothing like leaving it till the last minute.

Suzana Popovic-Montag:  That’s what we do these days.

Ian Hull:  Well, we were in the last podcast, we were sort of rounding up on our issues relating to inter vivos trusts but we also talked a lot about designations of beneficiaries.  So why don’t we talk a little bit about RRSPs and some tax issues surrounding them.

Suzana Popovic-Montag:  That’s a great idea, Ian, because we know basically that RRSPs and RRIFs, the Registered Retirement Income Funds, are deemed at law to be disposed of on death at fair market value.  And it’s the Income Tax Act that provides for that, that says, you know, on death, there’s a disposition.

Ian Hull:  So to be clear then, the value at death is the fully taxable income of the year in the year of death itself.  So it can be a big hit in terms of the tax burden and from that standpoint, the tax burden is typically paid out of the residue of the estate.

Suzana Popovic-Montag:  That’s right.  There is, though, an exception that arises in circumstances where the proceeds from the RRSP can qualify as a refund of premiums.

Ian Hull:  Well that’s right, and that’s a good point.  That doesn’t always arise in these situations but something we should also consider. 

Alright, so now just talking about this deferring tax with RRSPs.  The proceeds themselves qualify as refunds of premiums only though if they’ve been paid to a surviving spouse or common-law spouse or a financially dependent child or grandchild.  So that’s how we get into this area of exceptions where we don’t have to pay this, what can be an enormous deemed disposition tax.

Suzana Popovic-Montag:  And if there is a beneficiary designation that’s actually in favour of one of those eligible persons that you talked about, Ian, the surviving spouse, the common-law partner, or some financially dependent child or grandchild, then the proceeds are actually going to be paid directly to that beneficiary as this refund of premiums.

Ian Hull:  Well that’s interesting.  And that’s a really important, almost akin to the rollover idea.  They call it as income tax can only do something different but it’s the same in terms of its effect.  So if the RRSP proceeds paid to the estate qualify as a refund in premiums and if they’re allocated to and are distributed by the executor to the eligible person, then we aren’t looking at that draconian and quite painful deemed disposition payment.

Suzana Popovic-Montag:  And what will happen in those circumstances is that the refund of the premiums is going to actually be included in the income of the recipient in the year that it’s received, as opposed to being included in the estate.

Ian Hull:  Okay. Now you were talking about the spouse or common-law partners and I mentioned this whole rollover idea.  How does that work again?

Suzana Popovic-Montag:  Well the spouse or common-law partner can put that refund of premiums into their own RRSP if they are under the age of 69, or into an RRIF or other annuity contract and then defer the tax, pursuant to the provisions of  the Income Tax Act.

Ian Hull:  And one thing that is not always considered and a bit little known, so to speak, is that dependent children or grandchildren may also use this refund of premiums to purchase a fixed term annuity to the age of 18 or something of that nature in terms of a financial instrument product and again, hopefully deferring this tax.

Suzana Popovic-Montag:  And Ian, when we talk about children or grandchildren who are dependent on the deceased, what are we talking about?

Ian Hull:  Well, it’s a good question because there’s a lot of to and fro on this issue and there’s certainly a lot of cases out there.  But in terms of looking at it from Revenue Canada’s standpoint and CRA’s standpoint, a child or a grandchild who is dependent because of a physical or mental infirmity is one that has to qualify in that sense.

Suzana Popovic-Montag:  I see.

Ian Hull:  So that kind of a situation, of course, and, you know, we can identify physical or mental infirmity fairly broadly, then that child can transfer the refund of premiums into this RRSP or the RRIF or the life or term annuity.  And all of this allows us to give some good tax deferral for someone who clearly would greatly benefit.

Suzana Popovic-Montag:  And thinking in turning to the next, we have sort of a deferring tax, there’s also a tax that arises on capital gains, and I thought maybe we could just talk about that a little bit.

Ian Hull:  For sure, because this is the thing we talked about trusts and those other instruments that we were using before.  But this is an important consideration because the deemed realization of capital property at fair market value is done immediately prior to death in terms of the calculation.

Suzana Popovic-Montag:  So you’re saying, Ian, then that when someone passes away, there’s this deemed, you know, realization of a capital property. So everything they own suddenly is deemed to have been disposed of, and if it was disposed of at a value greater than what it was purchased for, then that’s that capital gain we’re talking about taxing?

Ian Hull:  That’s right.  And it’s, I mean, it really is, it’s a bit of an artificial moment in time because obviously when you die, you haven’t got a fair market value, you haven’t got an instant value there but, you know, say you own a cottage property or a chalet in addition to your house because the house is a principal residence and treated slightly differently.  But say you’ve got a second property, the deemed disposition occurs on the date of your death.  Well, this cottage may not be sold for another three generations, who knows.  So you have to go back and work up what that is, as you say, in terms of the growth and the capital tax payable.

Suzana Popovic-Montag:  And in these circumstances, the deferral of the tax or a rollover of the property could be done.  And I think in that case then, it’s adjusted cost base, which is available to people so that on these transfers to a spouse or to a qualifying spousal trust, there is this deferral essentially of tax.

Ian Hull:  Right.  And we talked about in earlier podcasts why we would set up trusts.  Well this is one of those situations where you are essentially rolling the asset into or assets, say there’s an investment account or a bank account, and then a cottage.  You’re rolling it into this spousal or qualifying spousal trust, therefore, and as you say, it’s at the cost base, the adjusted cost base.  So you’re really allowing for an important deferral and one that can be very important because spouses and certainly when you want to do some estate planning, maybe one spouse has more assets than the other or the like.  And you want to make sure that that surviving spouse isn’t hit with a heavy burden of tax or too heavy of a burden of tax.  And this rollover goes a long way to avoiding that.

Suzana Popovic-Montag:  And so the idea then, just so I understand it, really is that on the date of a spouse’s death, there’s a deemed realization of all property.  So capital property in this case, which will generate either a capital gain or a capital loss.  And instead of paying tax on it at that moment of time, provided that the deceased has planned his or her affairs properly, then that gets transferred over to the surviving spouse, or to that surviving spouse’s trust?

Ian Hull:  That’s right.

Suzana Popovic-Montag:  Oh, that’s great.

Ian Hull:  So now, let’s sort of talk a little bit about what that is.  I mean, we’ve talked about the concept generally but let’s talk about what it is to be, how do you qualify as a spousal trust?

Suzana Popovic-Montag: Well in that situation, the surviving spouse has to be entitled to all of the income during his or her lifetime.  So we talked about previously that a trust usually has a breakdown between the income beneficiaries and the capital beneficiaries and to be a qualifying spousal trust, there is that requirement that all the income specifically goes to the spouse and no one else.

Ian Hull:  And that is so crucial.  I mean what CRA says is that if you’re going to do this and you’re going to take advantage of it, we’re only going to give it to certain situations and that is to a surviving spouse.  So if you allow for anyone else to get at the income from this trust, you’re going to create problems.  We’ll talk about those problems in a few minutes but the idea is, is that you restrict who gets the benefit.

Suzana Popovic-Montag:  And I’m presuming that’s what they refer to as “tainting” the spousal trust.

Ian Hull:  That’s right.  And because as the rules are clear in the Income Tax Act, only the surviving spouse can have use of the income or the capital, to be fair.  You can also, the surviving spouse if the trust is set up properly, you can also use the income and then maybe you need another $10,000 or something to buy a new car or something, you’re allowed to pull capital out as well.  But the key is, is that it’s only the person…the question is, is that whose benefit is the money going to?  And like you say, this whole idea of tainted and it will be tainted or it will not be an effective, proper spousal trust if you have anyone else able to access that money.

Suzana Popovic-Montag:  So either the income or the capital during the spouse’s life?

Ian Hull:  Right.  Now, it’s interesting, like for example, what a lot of trusts will have is a contingent interest which is that there’s a possibility of someone else getting access to it.  And say you say, well the income and capital can go to my surviving spouse or my daughter, Betty.  And if you have that kind of language in the trust, you’ve changed it.  It is no longer a truly spousal trust in the mind of CRA.

Suzana Popovic-Montag:  And so the idea really is to be careful when those trusts are being drafted so that, as you say, a contingent interest doesn’t somehow taint the trust.  And I imagine the same would be the situation if there’s a direction in the trust to pay the income until death or remarriage, which is kind of language that we see typically in situations where a spouse survives another spouse.  And that kind of direction would also taint the trust, I imagine.

Ian Hull:  That’s right because you’re allowing other events to transpire.  Alright, well I know this is sort of a bit heavy in terms of the tax side, but it’s such an important part of the planning that we, you know, when we were sitting back and trying to plan our next 50 podcasts, we thought one of the things that we maybe have glossed over which is fine, but we may have glossed over a little bit was some of the detail on these tax issues.  And because we keep talking about the fact that it is so tax-driven, most estate planning.  Well, in fact, it is for a good reason and so we are going to continue to spend a little bit more time on some of these basic tax concepts so that we understand what is, you know, probably 75% of the planning that goes behind estate planning is tax-driven and why.

Suzana Popovic-Montag:  Well, that’s great Ian.  Thanks very much.  I look forward to our next podcast.

Ian Hull:  Thanks Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag.  The podcast you have been listening to has been provided as an information service.  It is a summary of current legal issues in estates and estate planning.  It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

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This week on Hull on Estate and Succession Planning, Ian and Suzana discuss different options for dealing with capital gains tax as it pertains to investments like 'The family cottage'.

Click "Continue Reading" for the transcribed version of this podcast.

Posted on August 21^st, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #74 of our podcast on Tuesday, August 21^st, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: I’m fantastic.

Suzana Popovic-Montag: That’s good.  Are you enjoying the summer?

Ian Hull: Yeah it’s good.  It’s, you know, it’s been a lot of fun and the weather has been good here in Toronto.  And a little hot in downtown Toronto a few days, but managed to get up to a cottage from time to time.

Suzana Popovic-Montag: That’s good.

Ian Hull: Speaking of cottages, let’s continue on with our discussion about cottages.  I know our last podcast, we talked about the cottage experience and really just sort of planning steps. Talked a little bit about what we needed to know about capital gains taxes.  Used that illustration, which is important, where we broke down, if we recall, there was a sale price of $600,000.  We took the adjusted cost base of $80,000.  Got it to the capital gain of $520,000 and then the tax payable on that broken down to about $117,000 to $120,000 in tax. Just to remind us because that was sort of our starting point, as to what do we do about this $120,000 tax payable either on death or before.

And we talked a little bit about the multiple uses that we have in managing this tax and this overbearing amount that has to be funded quickly, either after the transfer or after death. So we used a couple of examples too, about transfers during their lifetime.  And we talked about the gifting approach. And we got through part of the sale idea. But let’s just recap the sale option and maybe work through it a little more carefully.

Suzana Popovic-Montag: It’s a good idea, Ian, because when we were talking, we said that, you know, one of the options available in the circumstances, if the tax liability is going to be too high, is to consider actually selling the property to your family during the lifetime. Because at that point, your going to crystallize the tax liability to you and then deal with setting up any future gains which would then fall to your children or whoever you ultimately leave the cottage to at the end of the day.

Ian Hull: And we crystallized the tax at that point and that really gives you some certainty, both within your own estate planning standpoint and it allows you to not feel the burden of a major tax hit that’ll need to be paid down the road. So one of the things that I’ve experienced is that if you can afford a recreational property, maybe you can afford to give it away earlier or sell it earlier to the next generation. Maybe you can afford to pay the tax early.  And I know that sounds sort of counter intuitive because we live our lives trying to defer tax as long as possible. But in so doing, we also defer the issue.  And it may be that now, while you’re alive, it’s better to deal with it, both from a financial standpoint and from an emotional standpoint and managing the family sort of circumstances. For example, a sale of the property at fair market value to one of your kids might be the answer to bring the whole issue forward.  And it can be a useful tool from an estate planning standpoint. You weigh that against the fact that you’re not doing the classic “defer the tax until you absolutely last moment in time can”. And that’s a balancing I think you’ve got to decide whether it works better or not for your family.

Suzana Popovic-Montag: I think another option to sort of keep in mind too is that if you find that the possibility of having to pay the capital gains tax immediately is gonna pose too much of a cash flow problem to you, then you might consider some, you know, fancy estate planning or inter vivos planning in terms of selling or gifting the property in installments over a period of years, as opposed to just an outright sale at one point in time.

Ian Hull: So how does that work?

Suzana Popovic-Montag: Well, what would happen, Ian, is that a portion of the property would be transferred each year and then the capital gains tax payments would then be spread out effectively over a longer period of time.

Ian Hull: So that’s a more complex way of dealing with the sale, but maybe manageable, more manageable financially.

Suzana Popovic-Montag: And you could alternatively maybe consider selling the property and then taking a mortgage back from your family as consideration if, you know, there’s a fear that they wouldn’t necessarily have enough money to fund the purchase. Then you could set up an arrangement where you’re taking a mortgage back with or even without interest.  

Ian Hull: Okay, so…but what happens if you take the mortgage back and you sell it to your son and you take a mortgage back and there is no interest.  Does that create problems though?

Suzana Popovic-Montag: It could because you could be, you know, viewed by CRA, the tax authority, as doing a preferential share which might have some negative consequences to the family members.

Ian Hull: Right, because if the mortgage, if it bears interest, you have to declare the interest on your tax return even if the interest isn’t paid. So I know CRA will typically just attribute a value, the typical going rate for a mortgage would be “X” dollars and they’ll just attribute that as income to you.

Suzana Popovic-Montag: That’s right.  It’s going to be accrued as opposed to a cash paid basis. 

Ian Hull: Alright, what about another option entirely outside of this.  And maybe a bit outside of the box of what we’ve been talking about, but a living or an inter vivos trust?

Suzana Popovic-Montag: Well, Ian, if you want to transfer future gains in the hands of your children now, but you’re not really ready to give up the control of the property, then one of those options is, as you say, this living or inter vivos trust arrangement.

Ian Hull: So much like a gift of property though, the transfer itself into the inter vivos trust, into the living trust, will trigger an immediate taxable capital gains liability.

Suzana Popovic-Montag: But you can have the structure of the trust set up so that you can maintain control of the property during your lifetime and then have the control pass to your children on your death.

Ian Hull: So again, with no immediate tax liability to them in terms of probate capital gains or Land Transfer taxes, but you can manage the control issue and the tax issues in this living trust arrangement.

Suzana Popovic-Montag:   That’s right.  And that’s one of the benefits of that is, is as you say, the control. Like, you’re dealing with the property, you’re effectively, you know, crystallizing the tax liability, paying it, but you’re not losing necessarily the control over the property.  You can still go to it when you choose to, that kind of idea.

Ian Hull: So another sort of twist on this living trust idea is that the terms of the trust itself could provide a fund for maintenance and repairs to the property.

Suzana Popovic-Montag: And if you do think about setting up this kind of fund, you want to include in that terms that are going to allow the fund to actually grow over time. So that you do in fact provide a sufficient maintenance fund in the future.

Ian Hull: So it’s sort of like a living trust within a living trust.  We’ve got, maybe you put the property into one trust and then you throw some cash into another trust so that it can generate enough money to pay the expenses over time, and that way perpetuate the ownership of the trust into the next generations without being a tremendous financial burden on the next generations.

Suzana Popovic-Montag: That’s right, Ian.  That’s certainly the idea and, you know, we’ve seen many of those kinds of arrangements put into place quite effectively.

Ian Hull: So, again without being too overly tax technical about this, what’s one of the disadvantages of the living trust from a tax standpoint?

Suzana Popovic-Montag: Well from that perspective, one of the problems with the living trust is that all the income and the taxable capital gains are going to be taxed out.   What they call that top marginal rate.  And so the capital gain that, you know, likely wouldn’t be realized until the property is actually sold, but any income that’s going to be generated from investing that maintenance fund is going to be taxed still at that highest rate.

Ian Hull: You know and another issue I was thinking too with trusts is that all the property in the trust is deemed to be sold every twenty-one years for capital gains’ purposes. So that, in and of itself, creates us a new layer of bureaucracy in terms of the management of the trust itself. You’re always going to be triggering this capital gains every twenty-one years, so you’re not going to be able to avoid forever the capital gains within the trust.

Suzana Popovic-Montag: It is generally, though, possible to roll out the property to the trust beneficiaries at the cost base and then avoid any kind of deemed disposition. But that effectively means that the trust then has to be wound up.

Ian Hull: If you’re sixty-five years or older, you also could consider getting into the whole sort of realm of setting up an alter ego trust or a joint partner trust or some of the new sort of trust arrangements and transferring of property arrangements that exist in the estate planning world.

Suzana Popovic-Montag: And what would the advantage of that kind of arrangement be, Ian?

Ian Hull: Well if you are over sixty-five and you meet a certain criteria that the CRA will insist on, this will avoid the capital gains being triggered at the time of the transfer. So you are essentially rolling it into a trust that doesn’t trigger the capital gains, but your heirs, your ultimate beneficiaries, will have to pay the tax on your death.

Suzana Popovic-Montag: So it’s really a deferral it seems, then.

Ian Hull: Yeah.

Suzana Popovic-Montag: And I guess, you know, in those circumstances, you’d be looking to a lawyer to help you deal with these complicated rules that surround these different kinds of trust arrangements and agreements. So that you can come up with some kind of structure that works really to your best advantage, whether that is, you know, crystallizing and paying the capital gains tax now or deferring it to a later point in time or deferring it even to the time of your death.

Ian Hull: Well I agree and, you know, sort of as we wind up today’s podcast, I just…we kind of harkened back to what we sort of see time and time again in estate planning and that is this struggle between dealing with the payment of tax versus dealing with the right, and I say right, the proper maybe, estate planning for the benefit for your family. And the tax benefits don’t always equal the estate planning benefits. The family benefits, the idea that, you know, you want to keep harmony and you want to keep balance within the family.  And if you are governed, and this is sort of we’ve gone through these examples so far just in this example, if you’re governed by tax avoidance or tax deferral in your estate plan, it can be treacherous because there are so many other factors to consider. And if you have the financial resources for the recreational property, it may be that you should step away from the tax liabilities and exposure and start thinking about dealing with these properties, with your family in mind, not the tax person in mind.

Suzana Popovic-Montag: That’s some pretty sound advice, Ian.

Ian Hull: Alright, well listen, thanks very much Suzana and we will go back out into the world of lovely summer here in downtown Toronto.

Suzana Popovic-Montag: Thanks to you Ian.  I look forward to our next podcast.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

In this week's episode of Hull on Estate and Succession Planning, Ian and Suzana talk about capital gains taxes and what you need to know about them relating to the family cottage.

Click "Continue Reading" for the transcribed version of this podcast.

Posted on August 14^th, 2007 by Hull & Hull LLP

Suzana Popovic-Montag: Hi, and welcome to Hull on Estate and Succession Planning. You are listening to Episode #73 of our podcast on Tuesday, August 14^th, 2007.

Welcome to Hull on Estate and Succession Planning, a series of podcasts hosted by

Ian Hull and Suzana Popovic-Montag, that will provide information and insights into estate planning in Canada, from the offices of Hull Estate Mediation in Toronto, Ontario, Canada. Here are Ian and Suzana.

Ian Hull: Hi Suzana.

Suzana Popovic-Montag: Hi there Ian, how are you?

Ian Hull: I’m just terrific thanks.

Suzana Popovic-Montag: That’s good.

Ian Hull: We have been working our way around this potentially thorny issue of the family cottage.  And while we have not pretended for a moment that we have great tax expertise, we wanted to today talk a little bit about the capital gains tax, what you need to know about capital gains taxes and some of those issues relating to the family cottage.

Suzana Popovic-Montag: Ian, you might recall during our last podcast, we were talking about the fact that family dynamics and emotions play such a strong role when we deal with these cottage issues in estate litigation matters. But I think that next to that, that family dynamic component to it, the other most significant issue really is the capital gains taxes that arise from these kinds of recreational properties.

Ian Hull: And while you can buy or sell your principal residence, the home or the condominium that you might live in without paying capital gains taxes in Canada, on that increased value, you do have to pay capital gains tax on secondary cottages, properties such as the cottage or the chalet or other recreational properties. 

Suzana Popovic-Montag: The key exception, though, is when you actually leave this property to your spouse, so that the taxes in that case are actually deferred until your spouse dies. And I know that this is referred to as a spousal rollover.

Ian Hull: But except for that exception, if your vacation property has appreciated in value and your estate may, of course, face a significant tax bill. What we want to talk about a little bit is, you know, what if that tax liability isn’t covered.  What do we do?

Suzana Popovic-Montag: And Ian, do you think it would be helpful maybe just to talk a little bit about how that capital gains calculation is actually done on a property?

Ian Hull: For sure, because let’s just use an illustration.  Because, of course, if your beneficiaries have to sell the property to pay the taxes, then your estate plan may not be exactly what you had hoped it to be. So here’s an example of how you might calculate a capital gains tax on a property.

Suzana Popovic-Montag: So if you start, let’s say, with a property that was purchased back in the 1970’s.  Let’s say that the cottage was actually bought for $50,000.

Ian Hull: So in 1985 though, of course, you’ve had to spend some money upgrading.  And let’s put a number of, say you paid $50,000 for the cottage and you spent by about 1985 about $30,000 in upgrading it, putting a little addition on it and that sort of thing. 

Suzana Popovic-Montag: And then you look at what the property is actually worth the day you want to sell it and that’s the fair market value of the property.  And let’s suppose that now the property has been very successful in appreciating in value and now it’s worth $600,000. 

Ian Hull: So you take the sale price of the $600,000 and then you take off from it what we call the adjusted cost base.

Suzana Popovic-Montag: And that adjusted cost base is comprised of, you know, what that property actually cost you when you originally bought and what value you’ve added to it since you purchased it. And that, in our example here, we talked about the $50,000 being the purchase price and the additional, you know, upgrades to the property of $30,000, for a total of $80,000 in terms of the cost base of the property.

Ian Hull: So you’re allowed to deduct that cost base off the $600,000 sale price, leaving you with a resulting capital gain, not a capital gains tax, but a capital gain of $520,000. 

 Suzana Popovic-Montag: So since you’ve purchased that property, it’s technically appreciated in value by, you know, $520,000. And so if you look at the current capital gains tax rules, at least here in Ontario, 50% of that increase in value, that capital gain, is gonna be taxable.

Ian Hull: So just using our example here, remember we said that there was a capital gain of $520,000, 50% of $520,000 would be $260,000.

Suzana Popovic-Montag: And that $260,000 then becomes taxable at your highest marginal tax rate.

Ian Hull: So if the highest rate, for example, would be 45%, you’d have to pay a tax of $117,000 in capital gains tax.

Suzana Popovic-Montag: And that, of course, raises the question at the end of the day as to whether or not your estate has sufficient cash to pay that tax liability without maybe having to sell that property or coming up with the cash some other way.

Ian Hull: ‘Cause if not, you’re potential heirs and the family could lose what is often a cherished asset that you never intended to have sold on the day of your death. 

Suzana Popovic-Montag: But the good news, though, is that, you know, with some advance planning, turning your mind to these possibilities and the fact that this could arise, you can actually arrange to cover that anticipated tax liability with some creative estate planning.

Ian Hull: Alright.  Why don’t we talk about those?  And let’s start with the first.  You know, we’ve got to really essentially manage the taxes.  So the first idea is, and we’ve used this example in the past, is the idea of life insurance. 

Suzana Popovic-Montag: And life insurance, Ian, really is one of the most I’d say straightforward methods of trying to cover your vacation property tax liability when you die. Because what you’re doing is you’re purchasing life insurance for that very purpose.

Ian Hull: So your estate would receive as a death benefit, a tax free death benefit, the life insurance proceeds. And those proceeds can be used to pay the capital gains tax liability and any other administrative fees and expenses that are associated with settling your estate.

Suzana Popovic-Montag: And the clearest advantage of that then is that you have the comfort of knowing that your family’s not going to have to sell your cottage or your vacation property and that at the end of the day, they’ll actually receive a larger estate.

Ian Hull: Now in terms of managing taxes, there’s another sort of series of steps that you can think of.  And we sort of qualify them under transfers during your lifetime.

Ian Hull: And so Ian, as you say, it’s another way of actually managing the issue by proposing to deal with your property during your lifetime as opposed to transferring it on death. And it has some advantages do that kind of operation as well.

Ian Hull: So besides selling the property maybe to your family members outright, there are several ways to consider transfers during your lifetime that will help manage the tax.

Suzana Popovic-Montag: And one of the clearest examples that comes to mind is actually gifting the property to the people you intend to get it.

Ian Hull: Another example is making one or more of your children joint owners of the property with you.

Suzana Popovic-Montag: Or even by transferring the property to a trust where you can actually name your children or the other family members as beneficiaries of that trust.

Ian Hull: So if we step back with these three different options and we’ll work through these in some detail. But all three options will trigger an immediate capital gain in your name.

Suzana Popovic-Montag: So when you do transfer the property during your lifetime, suddenly that tax liability is gonna be crystallized and it’s gonna be your responsibility as opposed to that of your beneficiaries.

Ian Hull: Alright.  Let’s turn to the gift idea.  So if you can afford to pay the capital gains tax yourself that’s been accrued to death, and we’ll come back to our example before.  It’s a significant number, it’s $117,000 on what is a $600,000 property. And you can afford to pay that capital gains now and you want to sort of defer the future gains to the next generation.  You may want to consider gifting the property to your children.

Suzana Popovic-Montag: And the effect of gifting the property really is to trigger an immediate capital gains tax that, as we said, you know, would be your responsibility to pay that, which is gonna be taxable in your hands.

Ian Hull: So the long and short of it is you gift it, you pay the tax, you better have the dough at the time you’re gifting it or else this plan doesn’t really work. 

Suzana Popovic-Montag: The good news, though, is that the future capital gains on that property, so if it continues to appreciate in value, that future gain is going to be the responsibility of your children.  And it’s not going to be taxable until they in turn either die or sell the property. So your death is not going to trigger any tax liability to them.

Ian Hull: So an added bonus is that Land Transfer Tax…there’s an extra tax that often applies when you transfer properties.  But it doesn’t apply when there’s gifts and when there’s an estate in that situation. 

Suzana Popovic-Montag: And there’s the added benefit also to your estate of avoiding probate fees at the end of the day which, you know, in most provinces here in Canada, are payable based on the value of your estate.

Ian Hull: Alright, let’s turn to the idea of a sale.

Suzana Popovic-Montag: Well, Ian, you can certainly choose to sell your property to, you know, a non-family member or even family members during your lifetime.

Ian Hull: So if you do this, it is usually best to sell the property at fair market value from a tax standpoint.

Suzana Popovic-Montag: And why do you say that Ian?

Ian Hull: Well because you’ll still be charged the capital gains tax on the full market value even if you sell it for less. So if you try to give your child a benefit of a lower price then the differential between the actual fair market value and the lower price that you give to your child will be taxable like the gift that we just talked about.

Suzana Popovic-Montag: And in addition to that, the adjusted cost base that we talked about, you know, the original cost of the property plus any value that you’ve added to it, that adjusted cost base is going to be what your family members are going to be presumed to have paid for it. And it’s not the fair market value that they’re going to have attributed to them.  So they could possibly end up paying a hefty capital gains tax bill down the road.

Ian Hull: So you’re sort of, you know, you don’t get that far ahead if you try to do the sale route from the tax standpoint. But anyway, why don’t we at this point, wind up our podcast for today.  We’ve touched on some of the issues and there are more issues to address in the context of the transfer of the cottage property and we’ll save those for our next podcast.

Suzana Popovic-Montag: Okay.  Well thanks very much, Ian.  I look forward to our next podcast.

Ian Hull: Thanks Suzana.

You’ve been listening to Hull on Estate and Succession Planning with Ian Hull and Suzana Popovic-Montag. The podcast you have been listening to has been provided as an information service. It is a summary of current legal issues in estates and estate planning. It is not legal advice and you are reminded to always talk with a legal professional regarding your specific circumstances.

To listen to other Hull On podcasts, or to leave a question or comment, please visit our website at www.hullestatemediation.com.

Our theme music is UpTempo14 by Gary and is courtesy of the Podsafe Music Network.

READ THE TRANSCRIBED PODCAST HERE

During this podcast, Suzana discussed the type of taxes that arise on death and suggested ways to defer or reduce each of them:

(i) capital gains tax;

(ii) tax on RRSP and RRIF assets; and

(iii) probate fees Suzana then discussed other tax reduction strategies as well. --------